I’m usually the type of person who has a difficult time planning ahead. Sometimes it’s hard enough deciding what I’ll eat for dinner, let alone figuring out what I want for my life in the next five years.
When I was younger this was a problem. I had the tendency to make purchases on a more impulsive basis, only weighing how secure I felt at my job, what I needed and what I wanted. I never really had a plan.
But now I know that’s not the best way to get ahead – in fact, according to some experts, having a five-year plan is not nearly enough to help you save money on a mortgage. And having no long-term mortgage plan at all is the best way to over-stuff a bank’s pockets with more of your hard-earned cash.
How can I save money on my mortgage?
It might be easy to think that the best way to save money on a mortgage is to get the lowest available interest rate. But that’s not always the case.
“People are obsessed with the rate,” says Elke Rubach, president at Rubach Wealth: Holistic Family Advisors.
“Everybody says: ‘Oh my broker got me 2.2%’ or ‘My broker got me 2.5%,’ but if that 2.2% involves signing a contract with a bunch of other things that you didn’t take the time to see whether they apply to you, that’s a problem.”
And while it’s a broker’s job to shop around and get lenders to compete against each other to get you the best rate, that’s not really what’s going to save you money in the long run.
“Even if you know nothing about mortgages, if everyone had a 1% interest rate, not all mortgages would be the same,” says Peter Majthenyi, a mortgage planner with Mortgage Architects.
“And figuring out what type of mortgage will be the best for you will depend on the terms and the fine print of the contract. A 1% interest rate at one bank might be significantly more expensive than a 1.2% interest rate at another. And banks are hoping you won’t read the fine print.”
This is where brokers or mortgage planners come in. They understand that fine print. But most importantly, they get that understanding these details when you’re buying a home can be overwhelming for anyone, no matter their affluence or their education.
Understanding the fine print
“Remember, banks are not educators. Banks are suppliers, and mortgage products are some of the least profitable assets they hold,” Majthenyi says.
Banks make big money when people break the terms of the contract and become subject to penalties and fees.
These fees are determined by the details in the fine print of your contract, and the fine print is affected by the terms of your mortgage. For example, how long your term is, how long the amortization period is, whether it’s an open or closed mortgage, whether you get a fixed or variable interest rate, etc.
“Four out of five Canadians choose to change their mortgage before the five year term is out,” says Majthenyi.
Yet, most banks will try to sell you a five-year, closed mortgage, even though there is no data that says a five year timeline is good. This is how you can end up owing much more than you had originally anticipated.
The only way around it is to be fully educated about the decision you’re making.
“Just because the bank says you can afford a mortgage, it doesn’t mean you can,” says Rubach. “They’re not asking you exactly what your lifestyle is, what’s important to you. They don’t go into the deep analysis of a personal situation.”
And for this deep analysis, mortgage brokers will ask you questions. Lots of questions. Sometimes deeply personal questions.
Things like, ‘is your spouse aware of your spending?’, or ‘do you plan on having kids?’ Because if you do, it will affect your income and your spending.
All of these things affect the type of mortgage that you will be able to afford – not just now, but in your future.
“We look at short and long term goals, and see what the best plan is for each individual,” says Majthenyi.
The perfect match
For mortgage brokers, the plan is key.
“The more you tell me, the better I can diagnose. If you show up at the emergency room, you probably need some sort of attention, but you need to tell them all the information so they can get you to the right person,” says Rubach.
And it’s the same thing for getting a mortgage. Your broker or planner ‘triages’ you and helps match you with the right lender.
This is what you and lenders pay them for in the built-in fees.
“Brokers are making money, and they’re working so they should be compensated, but it’s just a matter of disclosure and value delivery,” says Rubach.
Their job is to make sure you understand your options, what the fine print on each contract really means for your future, and that you make an independent, informed decision.
The best advice
There isn’t a set rule book or guideline that will teach you how to make the best plan. The rule of thumb doesn’t work on individuals, but Majthenyi says one of the best things you can ask your broker, specially if you’re a first time home buyer, is this:
“For my profile, what are others like me doing to save money?”
He says that no two mortgages are the same, just like no two people are the same. But seeing what others are doing can give you a baseline to work with.
For Rubach, her answer is simple. “At the end of the day, I don’t really care about how much you make, I care more about how much you spend. So when you’re getting a mortgage, make sure you understand what you’re getting into and run your numbers as part of a plan. Not just in isolation.”
Beyond five years
It’s important to understand that even with a plan, life is unpredictable.
“We look at your plan further than five years because we don’t know where interest rates will be when it’s time to renegotiate your mortgage,” says Rubach.
Rising interest rates could have a significant impact on your mortgage payments. So brokers and planners will ask, ‘Even if you can afford a $300,000 mortgage now, will you be able to afford it if interest rates are higher when your term is up?’
Having an answer to that will help you make a better decision now. And remember, even though no mortgage broker can tell you what will happen in five years, it’s always best to have a plan.